Senate Minority Leader Mitch McConnell speaks about the stimulus package on Feb. 2, 2009 in Washington, D.C. Republicans are criticizing the Democrat's near trillion dollar stimulus package and are asking for revisions before the Senate votes later in the week.

A "Buy American" provision being debated as part of the Senate's nearly $900 billion economic stimulus package - requiring that infrastructure projects use U.S.-made materials and equipment - is sparking talk of a trade war and is forcing President Obama to choose whether to defend domestic industries or champion free trade.

The dispute pits U.S. steelmakers, labor unions and their legislative allies against the U.S. Chamber of Commerce and key trading partners such as Canada and the European Union, which fear the impact on their industries and could retaliate against U.S firms.

The top Senate Republican, Minority Leader Mitch McConnell of Kentucky, said Monday that the measure should be stripped from the bill, saying it could endanger more U.S. jobs than it protects.

"I don't think we ought to use a measure that is supposed to be timely, temporary and targeted to set off trade wars when the entire world is experiencing a downturn in the economy," McConnell said. "It's a bad idea to put it in a bill like this, which is supposed to be about jump-starting the economy."

The issue puts Obama in a proverbial pickle. During the campaign, he pledged to take a harder line in international trade talks to protect U.S. workers, and he drew heavy support from organized labor, including the United Steelworkers. But he also has talked of the merits of free trade and warned in a speech in Flint, Mich., last June that protectionist policies could make us worse off.

The White House might have tipped its hand about what it will do when Vice President Joe Biden, in an interview last week, defended the "Buy American" provision.

"I don't view that as some of the pure free-traders view it, as a harbinger of protectionism," Biden told CNBC. "I don't buy that at all. So I think it's legitimate to have some portions of Buy American in it."

But after an outcry from some of the country's closest allies abroad, the White House said it is scrutinizing the measure to make sure it complies with U.S. obligations under trade agreements.

White House review

"The administration is reviewing that provision," White House spokesman Robert Gibbs said Friday. "It understands all of the concerns that have been heard, not only in this room but in newspapers produced both up north and down south."

The genesis of the provision is a Great Depression-era law, the 1933 Buy American Act, which required the government to give preference to U.S.-made products in all its purchases. The law gave a boost to U.S. manufacturers, but critics say it lengthened the depression by drying up global trade.

Since 1982, U.S. steel and iron producers have had preferences in federal highway and transportation projects, although exceptions to use foreign materials were granted under certain conditions.

Those preferences would be extended to all infrastructure projects in the stimulus plan - fixing schools, modernizing the electric grid, repairing water systems - under a House provision by Rep. Peter Visclosky, D-Ind., which was passed with unanimous support in committee and approved as part of the House's $819 billion stimulus bill.

Sen. Byron Dorgan, D-N.D., has included an even broader measure in the Senate bill that would require that all materials and equipment used in the projects be U.S.-made. Both House and Senate provision would allow a waiver if the cost of the project was driven up more than 25 percent by using U.S. materials.

But major U.S. manufacturers, including GE and Caterpillar, are lobbying against the measure, warning that foreign nations will raise trade barriers, hurting U.S. exports.

Fred Smith, the CEO of FedEx, said on ABC's "This Week" on Sunday, "If the Congress passes this Buy American provision, I can assure you - and we operate in 220-some-odd countries around the world and are a huge part of the import-export infrastructure of the United States - we will get retaliation, and it will be American jobs at risk."

Dorgan said the provision is needed during a time of economic emergency and could multiply the bill's job-creating impact by generating new orders for equipment and goods from U.S. factories.

"When taxpayer dollars are used, they should support the things produced here at home," he said.

Diplomatic problems

The issue could present Obama with diplomatic problems, especially when he visits Canada on Feb. 19 on his first official trip aboard. Canadian Prime Minister Stephen Harper has said the Buy American measure could violate World Trade Organizations rules. The stakes for Canada are high: The country sells 40 percent of its steel to the United States.

"We will be having these discussions with our friends in the United States, and we expect the United States to respect its international obligations," Harper told the Parliament last week.

Thomas Gibson, president of the American Iron and Steel Institute, a trade group, noted that the preferences for U.S. steel- and iron-producers in federal transportation projects have been on the books since 1982 without leading to a major trade war.

"All of our multilateral and bilateral treaties recognize that governments can favor domestic materials," Gibson said. "It's not been challenged, and we are now 26, almost 27 years into the program."